Corporate Finance – Special Situations Lawhttps://www.specialsituationslaw.com
The latest developments in Special Situations Law in CanadaMon, 21 Jan 2019 19:42:58 +0000en-UShourly1https://wordpress.org/?v=4.9.9The Buyback Bonanza Makes a Returnhttps://www.specialsituationslaw.com/2018/08/27/the-buyback-bonanza-makes-a-return/
https://www.specialsituationslaw.com/2018/08/27/the-buyback-bonanza-makes-a-return/#respondMon, 27 Aug 2018 16:50:41 +0000https://www.specialsituationslaw.com/?p=1810Continue reading]]>Recently, there has been a trend among both Canadian and United States companies to buy back their shares in order to boost stock prices. In the past – most notably during the “Buyback Bonanza” of 2007 – this strategy has been employed by companies as a mechanism to decrease the amount of outstanding shares, thereby increasing the value of the stock.

For years some have criticized share buybacks, asserting that focusing on short term increases in stock prices and profits is detrimental to long term economic growth. They argue that as individuals invest more in the short term, there is less investment to be made in capital improvements such as factories and technology. In their view, this has two negative implications: less investment translates to decreased earnings in the long-term and decreased future growth.

Others argue that short-termism is not a problem or, to the extent it is, is not as harmful to the economy as once believed. Statistics demonstrate that business investment in the U.S. has remained stable between 11-15% of GDP since 1970. Further, many argue that it is in fact economically efficient for executives to invest in their own companies provided that they perceive it to be the most appealing investment opportunity at the time, because companies in turn distribute this capital back to their shareholders who will then reinvest into the market.

However, in many cases, diminishing returns have caused investors and analysts to wonder whether buying back shares is an effective, long-term strategy. While the strategy may be rewarding for companies that demonstrate high sales and earnings growth independently of this tactic, other companies have not been able to reap the rewards of high share prices, despite large sums being spent on buybacks. As a result, analysts have suggested that perhaps that money would be better spent on capital improvements, such as better technology.

In spite of these concerns, we are seeing a strong resurgence in buyback activity in both the US and Canada. In the US, rates are expected to exceed those seen in 2007, where share purchases among S&P 500 companies hit a record number of $589.1 billion. The S&P 500 Buyback Index, which tracks the performance of the top 100 stock repurchasers, has gained only 1.3% this year, which is well under the performance for S&P 500 companies.

In Canada, while data are not as readily available, the trend is especially noticeable in the oil and gas sector, given the relatively low current stock prices in this industry. As the Financial Post has reported, a “disconnect” between depressed equity prices coupled with rising oil prices are spurring significant buyback activity among numerous Canadian oil and gas companies, particularly in Calgary-based companies. Further, the persistent downturn in the industry has motivated companies to reduce operating costs, which has in turn generated free cash to support buyback activity.

The trend is not limited to the oil and gas sector, either: in 2017 and 2018, prominent issuers in other industries also announced a share repurchase program (instance, in the financial services sector, as the Financial Post has also reported).

While both Canada and the United States seem to be following a similar path on this trend, it is important to reflect on whether the difference in Canadian issuer bid rules and the American voluntary safe harbour provision for stock repurchases – namely, Rule 10b-18 – might impact future activity. Both jurisdictions have implemented limitations on the percentage of share repurchases in a given period of time; however, the limitations of the U.S. are less stringent in that the restriction is on a daily basis. This means that while an issuer’s purchase cannot exceed 25% of the average daily volume, this cap resets the following day. The rules on normal course issuer bids in Canada on the other hand, only allow an issuer to repurchase either 5% of the outstanding shares or 10% of the Public Float, whichever is greater. So far, these differences do not seem to be having a major impact as both countries are seeing the stock buyback trend, but it is worth paying attention to in the coming months.

Overall, the strategy can be a risky one. Indeed, the “Buyback Bonanza” in 2007 was just before the stock market underwent its worst state since the Great Depression. This means that companies should be cautious in resorting to this strategy and consider the (possibly detrimental) consequences. Companies considering buying back shares in the face of distressed balance sheets or minimal free cash should be especially wary of potentially adverse outcomes.

The authors would like to thank Saba Samanianpour and Jessica Silverman, articling students, for their assistance in preparing this post.

The TSX’s updates mandate that each TSX-listed issuer (other than Non-Corporate Issuers, Eligible Interlisted Issuers and Eligible International Interlisted Issuers (as such terms are defined in the TSX Company Manual)) will be required to maintain a publicly accessible website. These issuers are also required to post constating documents (i.e. articles of incorporation or amalgamation and by-laws) as well as the following documents, if adopted:

any majority voting policy;

any advance notice policy;

descriptions for the positions of chairman of the board and lead director (the previously proposed requirement to post job descriptions of key officers has been removed);

any board mandate; and

any board committee charters.

The webpages where documents are posted must be easily accessible from the issuer’s home page. If a document required to be posted is contained within a larger document, the requirements will be satisfied by the posting of the larger document.

These updates to the TSX Company Manual are intended to provide participants in the Canadian capital markets with ready access to key security holder documents. While reporting issuers are required to file certain material documents with Canadian securities regulators, which are publicly available on SEDAR, this new policy is intended to enhance the accessibility of such documents to the investing public. Further, this updated policy requires affected issuers to post documents that may otherwise not have been public or readily viewable.

The author would like to thank Peter Valente, articling student, for his assistance in preparing this legal update.

]]>https://www.specialsituationslaw.com/2018/06/13/tsx-adds-new-website-disclosure-requirements/feed/0Making Your Vote Count: New Developments on Proxy Voting in Canadahttps://www.specialsituationslaw.com/2016/04/08/making-your-vote-count-new-developments-on-proxy-voting-in-canada/
https://www.specialsituationslaw.com/2016/04/08/making-your-vote-count-new-developments-on-proxy-voting-in-canada/#respondFri, 08 Apr 2016 19:27:52 +0000http://www.specialsituationslaw.com/?p=1492Continue reading]]>The majority of shareholders in Canada hold their shares through a broker or other intermediary which in turn holds their shares with the Canadian Depository for Securities Limited (CDS). Most voting at shareholder meetings therefore occurs within a layered, complex and opaque proxy system. This leads to uncertainty as to whether all of the votes of the true beneficial shareholders are properly tabulated. The Canadian Securities Administrators (CSA) have announced proposed changes to the process of vote counting and reconciliation, which will hopefully result in a more accurate, reliable and accountable voting system.

The CSA has proposed new protocols for the parties responsible for vote collection and tabulation. These parties include CDS, intermediaries such as brokers, Broadridge Investor Communication Solutions Canada (the main proxy voting agent for intermediaries) and transfer agents who act as vote tabulators at shareholder meetings. The new protocols delineate clear roles for each of these participants at each stage of the process and outline the operational processes that each should implement to ensure their roles and responsibilities are fulfilled.

The protocols include:

moving towards a paperless proxy voting system; and

developing end-to-end vote confirmation capability that would allow beneficial shareholders to receive confirmation that their voting instructions have been received by their broker or other intermediary and submitted as proxy votes, and that these proxy votes have been received and accepted by the transfer agent as tabulator.

In addition, the CSA intends to establish a committee to promote better communication, information sharing and problem solving among the participants responsible for vote collection and tabulation.

Although the CSA did not identify any vote reconciliation issues unique to proxy contests, the proposals, if implemented, will provide greater certainty and transparency for all parties involved in proxy contests and hopefully will provide beneficial shareholders with greater comfort that their votes were, in fact, properly received and counted.

The deadline to comment on the proposed protocols is July 15, 2016. The CSA intends to publish the final protocols by the end of 2016, in time for the 2017 proxy season. The protocols will likely be implemented on a voluntary basis initially.

Under Delaware law and most Canadian corporate statutes, a shareholder who votes against a fundamental transaction—such as a going-private transaction or a sale of all or substantially all of the corporation’s assets—is entitled to object to the consideration offered and in turn require payment of the “fair value” of his, her or its shares as appraised by court. Where an investor concludes that there is a significant gap between the price of a M&A transaction and the fair value of the shares, the threat of the exercise of such appraisal rights can be used as leverage for improvement in the deal terms. In certain instances, specialist funds have even begun to engage in a form of so-called appraisal arbitrage, whereby they will buy into a company on the brink of a sale just for the purpose of appraisal litigation.

Long one of the more esoteric remedies afforded shareholders, the exercise of such appraisal rights has been on a significant upswing in the U.S. in recent years. A record 33 public company appraisal cases were filed in Delaware in 2014, and that number is set to increase again this year, with 20 cases filed in the first quarter of 2015 alone. Indeed, a number of hedge funds have even been established that are devoted exclusively to appraisal actions as independent investment opportunities.

To date however, there have been only limited instances of appraisal litigation in Canada and it remains here as obscure as it used to be in the United States. Is it possible that will change any time soon?

To some degree, it’s hard to say. Particularly for an investor that is specifically investing for purposes of appraisal litigation, the strategy is not without its risks. Not only is there the legal risk inherent in the appraisal claim itself, but the party pursuing the claim also ties up its funds for the (often very lengthy) duration of the litigation, and without the benefit of any security on the assets of a successor company that is likely to have been leveraged up to finance the deal.

In the United States, these risks have been dampened and in some ways outweighed by procedural rules and case law.

Under Delaware law—where famously more than half of all U.S. publicly traded companies are incorporated—shareholders may receive statutory compound interest on the appraised award at the federal discount rate plus 5% from the transaction closing date until the award is made. That amount, set at a time when interest rates were much higher (and not as they are today at essentially the zero lower bound) is especially attractive given current market alternatives. Moreover, defendants in such cases are not entitled to pay down even the uncontested portion of the deal consideration while the litigation was ongoing, meaning that interest has to accrue on the full amount.

A loophole in Delaware law—confirmed recently in the Ancestry.com and BMC Software Inc.appraisal proceedings—also permits investors seeking appraisals to buy shares after the record date for voting on a transaction, and right up until the date of the shareholder meeting. In addition, one does not necessarily even need to show that the shares that one is seeking have appraised were voted against a particular transaction. Where a subject company’s shares are held by beneficial owners through a global nominee (such as DTC’s Cede & Co.), it becomes a practical impossibility to know whether particular shares were voted for or against a transaction. Accordingly, in such circumstances, a beneficial holder seeking appraisal need only hold less than the total amount of shares voted against the transaction in order to be eligible for appraisal. Needless to say, this allows such holders to act with the benefit of the greatest amount of information, a huge benefit when record dates almost always precede the distribution of proxy materials providing disclosure regarding the sale process as well as the valuation metrics and assumptions underlying the fairness opinion.

One further likely reason for the uptick in appraisal actions is simple: those who have pursued them have generally experienced success. Academic work in the area (for more, see here) has shown that courts have awarded “fair value” in excess of the actual deal price in the substantial majority of decided cases. Moreover, much of that success—in cases involving companies such as Dell, Dole and 3M Cogent—has been very prominent.

In Canada, the rules—naturally—are different and many of the structural elements that tend to favour parties seeking appraisal in the U.S. are simply not present. Notably, a party seeking appraisal under most Canadian corporate statutes may only be entitled to a “reasonable rate” of interest in most jurisdictions. Typically, this has meant the interest rates set by provincial courts for pre- and post-judgement interest, which are quite closely tied to market rates and are therefore much less lucrative than in Delaware (in Ontario, for instance, the current rate is 2%). In addition, civil litigation in Canada has long operated on the principle that the loser pays for its opponents legal costs, a sharp contrast from the general U.S. approach where—in shareholder litigation at least—the parties bear their own costs.

That said, whether Canada could see greater action in appraisal litigation remains very much on the table. Some provincial corporate statutes, notably Alberta’s, permit investors the key favourable right to exercise dissent rights following a record date, just as in Delaware. Similarly, there is case law in Alberta and Ontario to the effect that a dissenting shareholder is permitted to “buy into” the appraisal remedy if they so choose. Perhaps just as significant however could be the continuing sea change in shareholders’ assertiveness and tactical approach. Certainly in the U.S., the increase in appraisal actions has coincided with an explosion in shareholder litigation generally. To the extent that this is no coincidence, and is a product of the change in culture and approach more generally, it seems likely that increasing levels of shareholder activism in Canada may signal the beginning of an upswing in Canadian appraisal litigation as well.

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]]>https://www.specialsituationslaw.com/2015/10/08/delaware-north-the-potential-rise-of-appraisal-litigation-in-canada/feed/0Decision-making and Institutional Investors: Prevalent Factors and Key Market Distinctionshttps://www.specialsituationslaw.com/2014/12/15/decision-making-and-institutional-investors-prevalent-factors-and-key-market-distinctions/
https://www.specialsituationslaw.com/2014/12/15/decision-making-and-institutional-investors-prevalent-factors-and-key-market-distinctions/#respondMon, 15 Dec 2014 18:56:47 +0000http://www.specialsituationslaw.com/?p=1177Continue reading]]>According to the recently published Global Institutional Investors Insight survey, shareholder activism is on the rise. The survey, which canvassed over 500 institutional investor and sell-side research analysts from across North American, European and Asian markets, reports that more than three quarters (77%) of those surveyed believe that activism levels will increase in the coming three years and become more prevalent worldwide.

The survey also highlights the four most prevalent factors that investors evaluate when considering whether to invest in a company:

Good track record in meeting earnings expectations (65% of investors).

An equity story that is clearly defined (58% of investors).

A demonstrable link between the compensation of directors and company performance (54% of investors).

High quality investor relations team (51% of respondents).

Most interestingly, the survey outlines a number of key market distinctions investors in different regions consider when investing, including:

European investors place more importance on the degree to which director compensation aligns with corporate performance when compared to their U.S. investors — 62% in Europe versus 42% in the U.S.

77% of investors in Asia note that a digital and social media presence is important to driving a company’s valuation, compared to 40% for European investors and 49% for US investors.

European investors tend to have more diverse portfolios holding up to twice the number of stocks held than their Asian or North American counterparts.

63% of North American investors surveyed said they hold more than ¾ of the same stocks today that they held in 2013. In Asian markets, it is less than 10%. Over a five year holding period, 30% of North American investors had retained over half of their portfolio holdings, versus 26% in Europe and 1% in Asia.

]]>https://www.specialsituationslaw.com/2014/12/15/decision-making-and-institutional-investors-prevalent-factors-and-key-market-distinctions/feed/0Proxy solicitation: Not a matter of right in Albertahttps://www.specialsituationslaw.com/2014/12/09/proxy-solicitation-not-a-matter-of-right-in-alberta/
https://www.specialsituationslaw.com/2014/12/09/proxy-solicitation-not-a-matter-of-right-in-alberta/#respondTue, 09 Dec 2014 16:42:02 +0000http://www.specialsituationslaw.com/?p=1168Continue reading]]>The increasing prevalence of shareholder activism in Canada has significantly impacted issuers and investors alike in the Canadian capital markets.

Consequently, an understanding of the Canadian regulatory landscape governing activist activities has become increasingly important for both sides of an activist struggle. A key element of this understanding is acknowledging that the regulatory landscape is not always uniform from province to province.

Proxy solicitation in respect of Alberta corporations which are reporting issuers is governed under two legislative schemes: Part 12 of the Business Corporations Act (Alberta) (the ABCA) and Part 9 of National Instrument 51‑102 – Continuous Disclosure Obligations (NI 51-102). Compliance with the requirements of both legal regimes by a person or corporation attempting to solicit proxies from securityholders of an Alberta corporation is mandatory.

Section 150 of the ABCA governs the solicitation of proxies with respect to Alberta corporations. Essentially, subsection 150(1)(b) forbids the solicitation of proxies by a dissident securityholder unless that securityholder has sent out a dissident’s proxy circular in the prescribed form. The requirements of subsection 150(1) apply to all solicitations of proxies if the reporting issuer has more than 15 holders of voting securities listed on its register of securityholders.

Alberta’s proxy solicitation rules are unique in that, in every other Canadian province, a shareholder is permitted under NI‑51-102 to solicit proxies from up to 15 shareholders without sending a dissident proxy circular. Legislation in Alberta does not allow this as a matter of right – an application must be made to the Alberta Securities Commission for an “exemptive relief order”, which allows the (dissident) shareholder to solicit from up to 15 shareholders without a proxy circular.

As well, in contrast to the requirements of the ABCA, Part 9 of NI 51-102 applies to all proxy solicitations regardless of the number of voting securityholders on the register of the reporting issuer. Further, under Part 9 of NI 51-102, proxies may also be solicited by a dissident without a proxy circular in certain other specified circumstances, such as solicitations made by broadcast, speech or publication (generally known as the public broadcast exemption).

Further, certain activities pertaining to proxy solicitation are specifically carved-out from the definition of “solicit” under NI 51-102 but are not carved-out from the corresponding definition under the ABCA.

These differences require careful evaluation of activist activities which may be considered proxy solicitation involving reporting issuers governed by the ABCA. Without an in depth understanding of these differences, solicitation activities that may be expressly permitted under Part 9 of NI 51-102 may nevertheless be in violation of the ABCA, unless the correct steps are taken.

The Special Situations Team of Norton Rose Fulbright Canada LLP’s Calgary office have played leading roles in Alberta’s most high-profile shareholder activist and defence mandates, such as the August 2013 decision of the Alberta Court of Queen’s Bench in Genesis Land Development Corp. v. Smoothwater Capital Corporation et al.

]]>https://www.specialsituationslaw.com/2014/12/09/proxy-solicitation-not-a-matter-of-right-in-alberta/feed/0Corporate Governance 2014: Corporate Governance in Special Situationshttps://www.specialsituationslaw.com/2014/11/28/corporate-governance-2014-corporate-governance-in-special-situations/
https://www.specialsituationslaw.com/2014/11/28/corporate-governance-2014-corporate-governance-in-special-situations/#respondFri, 28 Nov 2014 16:29:26 +0000http://www.specialsituationslaw.com/?p=1165Continue reading]]>Norton Rose Fulbright Canada LLP and Lexpert will again be co-hosting two full-day seminar sessions entitled “Corporate Governance 2014: Corporate Governance in Special Situations” on December 4th (Toronto) and December 8th (Calgary). These seminars will include discussions on corporate governance developments in special situations, with specific focus on the trends, tools and defences used during proxy fights, M&A transactions, and situations of financial distress.

The seminars will be co-chaired by our partners, Walied Soliman and Orestes Pasparakis, who will be joined by the following speakers.

Norton Rose Fulbright Speakers:

Ava Yaskiel, Partner

Justin Ferrara, Partner

Cathy Singer, Partner

Jennifer Kennedy, Partner

Kirk Litvenenko, Partner

Stephen Kelly, Partner

External Guest Speakers:

Wes Hall, President and CEO, Kingsdale Shareholder Services Inc.

Michael Levin, Managing Director, Head of M&A and Restructuring, National Bank Financial

Tony D’Onofrio, Director of Board Engagement & Head of Research, Canadian Coalition for Good Governance

]]>https://www.specialsituationslaw.com/2014/11/28/corporate-governance-2014-corporate-governance-in-special-situations/feed/0‘Wolf Packs’ and Other Recent Trends in Hedge Fund Activismhttps://www.specialsituationslaw.com/2014/11/20/wolf-packs-and-other-recent-trends-in-hedge-fund-activism/
https://www.specialsituationslaw.com/2014/11/20/wolf-packs-and-other-recent-trends-in-hedge-fund-activism/#respondThu, 20 Nov 2014 16:25:50 +0000http://www.specialsituationslaw.com/?p=1161Continue reading]]>The recent increase in hedge fund activism is “hyperbolic” and should be carefully assessed, according to two notable scholars, John C. Coffee Jr. (corporate law; Columbia) and Darius Palia (corporate finance; Rutgers), who have just published on comprehensive study on hedge fund activism entitled, “The Impact of Hedge Fund Activism: Evidence and Implications.” The authors address various perspectives on the benefits and repercussions of hedge fund-led corporate change, relying on statistical analysis and market data to answer four questions:

Who are the targets of activism?

Does hedge fund activism create real value?

What are the sources of gains from activism?

Do the targets of activism experience post-intervention changes in real variables?

Changes in Institutional Ownership Behaviour

Coffee and Palia begin by pointing out that diversified fund managers are willing to consider and implement an activist tactic so long as it positively affects portfolio performance, but remind readers that activism is a relatively recent phenomenon. Historically, if institutional investors were not pleased with management, they sold their stock without interfering with management or corporate structure. But hedge funds are different. They hold concentrated, significant blocks in a limited number of companies, making activism “rational” from a cost/benefit analysis. The most common tactics have included “intervention” in corporate governance that leads to destaggered boards or calls for independent chairpersons; more significantly, activists have sought to fire the CEO or sell divisions or the company wholly.

Hedge Fund Demographics

Although there were 1,115 activist campaigns between 2010 and 2014, 148 of those were in the first six months of 2014. And although hedge fund activism used to focus on small-cap companies, nearly 1/3 of all activist campaigns today focus on companies with a market cap of over $2 billion; the number of campaigns against large cap (over $10 billion) companies has doubled since 2011. Whereas hedge funds, generally, earned increases of 3.1% in the first half of 2014, the subset of activist hedge funds more than doubled that, at 6.5%. It is no surprise, then, that their assets managed have grown over seven times from $23 billion to $166 billion between 2002 and early 2014. These funds specialize in short-term holdings, with a median period of only 266 days for ownership.

Sustaining their growth is their overwhelming success rate of nearly 80%: Hedge funds accounted for 24 of the 35 proxy contests that took place in 2013, winning 19 times. As such, the face of institutional ownership is not one of defensive passivism, as seen during the days of corporate raiders in the 1980s, but instead, one of advanced, offensive activism that seeks to bring about change with the intention of increasing shareholder value.

Success Factors

To explain why shareholder activism has risen sharply, the authors point to a number of factors:

There is today a significant decrease in costs in activist behaviour (relative to the very high profits hedge funds are able to now exact), which had traditionally hampered efforts;

The decline of staggered boards means director plans are no longer deeply entrenched within the organization and are now subject to change by external influences;

The rise of proxy advisory firms has meant that, in reality, most voting decisions are today outsourced to the likes of either Institutional Shareholder Services or Glass Lewis, which have supported activists in the past;

The Securities and Exchange Commission (“SEC”) has, in recent years, reconsidered policies that had a chilling effect on shareholder dissent, now permitting: (1) proxy advisors to distribute their advice; (2) allowing proxy solicitation; and (3) adopting a policy of “access-equals-delivery,” which allow proxy materials to be posted online; and

Other factors, including: new restrictions against brokers who would otherwise vote on behalf of their clients, as well as the favorability of activist plans that return cash to shareholders.

‘Wolf Packs’

By and large, the most notable success factor for activists in recent years is the prevalence of ‘wolf pack’ behaviour, which has resulted in the creation of “loose network[s] of activist investors” that take action collectively once a campaign is launched. Once these ‘wolf packs’ (a term first used by Vice-Chancellor Donald Parsons of the Delaware Court of Chancery) collectively cross the beneficial ownership threshold (5%), they continue buying even more stock in the ten-day window before they have to file a Schedule 13(d). It is only at that point that they must finally disclose their intentions with respect to their holdings. The authors have found that most of the appreciation of the stock price occurs just before the filing, which allows activists who have been tipped off regarding the forthcoming filing a “riskless opportunity” to purchase shares at current (which might later appear discounted) prices for “profitable trading” based on an asymmetry of information. Moreover, the “noisier” the campaign (which often degenerates into one that is also both “nasty and personal”), the more likely it is that activists may be able to launch calls for changes in corporate governance that are based not on the merits of the policies, but rather, on the “high probability” that those who purchase shares prior to the filing of the Schedule 13(d) “will profit handsomely” and “exit quickly.”

***

The remainder of the paper addresses these issues in the context of past and current activist campaigns, and particularly focuses on the attempts by Pershing Square Capital Management to help Valeant Pharmaceuticals acquire Allergan in a hostile takeover (it was announced this week that white knight Altavis PLC would be acquiring Allergan). The authors consider the impact of these recent tactics by pointing to market data, as well as the statistical analyses of a number of other scholars. The paper concludes with a number of recommendations—which are “the least drastic in establishing policy goals”—and provides an expanded discussion on what the long-term effects may be in having a regulatory system conducive for this type of activism. Coffee and Palia close by pointing to one externality that is little discussed but may have the greatest impact: “the shortening of investment horizons and the discouragement of research and development,” which may ultimately “disserve the American economy.”

]]>https://www.specialsituationslaw.com/2014/11/20/wolf-packs-and-other-recent-trends-in-hedge-fund-activism/feed/02014 Q3 Proxy Updatehttps://www.specialsituationslaw.com/2014/10/30/2014-q3-proxy-update/
https://www.specialsituationslaw.com/2014/10/30/2014-q3-proxy-update/#respondThu, 30 Oct 2014 23:34:44 +0000http://www.specialsituationslaw.com/?p=1152Continue reading]]>The 2015 proxy season is fast approaching, PwC and Broadridge released a quarterly research report which reviews proxy related data from 4,113 shareholder meetings
held between January 1 and June 30, 2014 and highlights several themes and trends that may inform how shareholders and companies will interact on four key issues:

Director Elections: Director elections continue to attract widespread voting, with 93% of elections at large companies garnering votes between 90-100%. In contrast, only 75% of voted shares were cast in the 90-100% range for small-cap firms. Moreover, of the 22,554 directors up for election, roughly 5% failed to receive 70% of the shares voted. Only less than half of that failed to get majority support.

Say on pay: The US Dodd-Frank Act of 2010 introduced a number of requirements that have greatly increased disclosure obligations, including ‘say on pay,’ which requires all public companies to present executive compensation plans to a shareholder vote. ‘Say on pay’ votes are becoming increasingly common in Canada. Although not binding, a failure to receive majority shareholder support is demonstrative of a lack of confidence or inflated compensation packages, or both. In any case, support of plans remained consistent with support in 2013, at 89%, with a slight drop in support at mid-, small-, and micro-cap companies. Overall, notwithstanding the increasing dialogue between directors and shareholders, the compensation landscape has not changed.

Independent board chair: 2014 has seen a notable increase in the number of shareholder proposals to separate the roles of CEO and Chair of the board; there were 53 such proposals made in 2013, and 62 in 2014, with an average support of 30% of shareholder votes and six successful proposals.

Social and environmental proposals: Proposals relating to social and environmental issues have increased through the 2014 calendar year, but have only garnered 18% support when put to a vote. In Canada, most provinces have adopted the amendments to National Instrument 58-101 which provide for new enhanced corporate disclosure of board diversity and board renewal policies, expanding ‘comply or explain’ responsibilities with respect to the representation of women on boards. The 2015 proxy season will represent the first test of these new obligations and activists will be watching closely.

Other notable trends that we will likely see include a continuation of the increasing reliance on electronic delivery of proxy materials, as well as electronic voting. In addition, virtual shareholder meetings promise to grow due to advances in the accessibility of conferencing technology. Finally, institutional ownership is up to 71% (with 29% retail ownership), reflecting an increasing reliance on investment management firms.

As we close out the fourth quarter of 2014, shareholders, activists and companies will be watching these themes and trends closely to understand what will likely influence proposals and voting in 2015.

]]>https://www.specialsituationslaw.com/2014/10/30/2014-q3-proxy-update/feed/0Defensive Tools in Shareholder Activism: The “Voting Pill”https://www.specialsituationslaw.com/2014/10/27/defensive-tools-in-shareholder-activism-the-voting-pill/
https://www.specialsituationslaw.com/2014/10/27/defensive-tools-in-shareholder-activism-the-voting-pill/#respondMon, 27 Oct 2014 21:31:22 +0000http://www.specialsituationslaw.com/?p=1148Continue reading]]>In today’s Financial Post, Barbara Shecter highlighted the use of modified shareholder rights plans (colloquially known as “poison pills”) as an emerging defensive tool against opportunistic shareholder activism in Canada. Traditionally, poison pills are used by boards of target companies as defensive tools to guard against unsolicited takeover bids. By expanding the typical definition of “beneficial ownership” in a poison pill (which is typically limited to concepts of ownership and is used to determine whether the poison pill is triggered) by including securities that a shareholder does not own but has a right to vote or the right to direct the voting of, the poison pill could then be triggered where a group of shareholders intend to vote together even if they don’t own shares or intend on making a takeover bid. In this context, the poison pill works to defend against predatory “wolf‑pack” shareholders who intend on using their collective voting power to seek control of the target, instead of making a bid. Such modified poison pills are known as a “voting pill” and, as Ms. Shecter points out, are already well-known in the United States. The rise of advance notice by-laws in Canada are another example of a defensive tool that enjoyed widespread use in the United States prior to becoming popular in Canada.

Given the recent statements by hedge-fund manager Bill Ackman regarding Canadian capital markets as being fertile ground for activists, and the recent cautionary piece by Wes Hall (founder of Kingsdale Shareholder Services) which argued that Canadian public companies are ill-prepared to deal with the next wave of shareholder activism, it is perhaps not surprising that Canadian public companies are receptive to including additional tools, such as voting pills, in their defensive proxy playbook. However, it is uncertain whether voting pills will enjoy the same popularity and success as advance notice by-laws. Proxy advisory firm ISS, for example, does not support the adoption of poison pills that do not exclude reference to voting agreements among shareholders, and securities regulators may be less willing to permit a poison pill to stand where the effect appears to be to prevent proxy contests.

The increasing interest in voting pills however, particularly following the recent rise in popularity of advance notice by-laws, may signal that Canadian public companies are seeking to adjust to the challenges of an increasingly activist corporate landscape. It is a landscape that, as Mr. Hall explains (and as alluded to in the statements of Mr. Ackman), is already familiar to veteran activists, many of whom come from south of the border. For Canadian public companies, such challenges require boards, their advisors, and, where appropriate, securities regulators, to carefully consider the appropriateness of any defensive tool. For shareholder activists, such challenges represent a new frontier of opportunities.